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Business owners in the private sector have raised concerns over a new tax measure introduced under the Income Tax Bill of Bhutan 2025, warning that it could affect businesses of all sizes that rely on loans to survive or expand.
The provision, known as the “Earnings Stripping Rules”, that limits how much of a company’s loan interest payments can be deducted when calculating taxable income. This provision has raised concerns among businesses, particularly those that rely on loans for survival or expansion.
Critics argue that limiting interest deductions could increase the tax burden on companies and potentially hinder their growth and investment capacity.
Until now, Bhutan’s tax law (Income Tax Act 2001) allowed businesses to deduct interest on loans as long as their debt and equity followed a 3:1 ratio. For example, if a company had Nu 750 in loans and Nu 250 in equity, it could deduct the interest on the entire Nu 750 loan.
Starting January 2026, this will change with the new Income Tax Act. The new “Earnings Stripping Rules” will replace the old system. Under these rules, a business can only deduct interest expenses up to 30 percent of its EBITDA (Earnings Before Interest, Tax, Depreciation, and Amortization).
The private sector pointed out that such rules are usually adopted in other countries to prevent multinational corporations from avoiding taxes by loading up on loans and shifting profits across borders. Members of the private sector have voiced that in Bhutan, this risk is minimal because tax deductions are already limited only to loans from recognized financial institutions or inter-corporate borrowings, with informal lending excluded altogether.
They also said that the new provision could have wide-ranging effects. Startups and small enterprises with thin margins, established firms that borrowed heavily to expand, and struggling companies with high debt burdens could all be affected. They said that some firms may be forced to show taxable profits on paper even when they are incurring real losses, as they would not be able to deduct the full cost of their loans.
They further talked on what it sees as a contradiction in government policy. On one hand, the government has been promoting investment by offering concessional loans at 4 percent through the ESP scheme, easing foreign direct investment rules, and encouraging private sector growth. On the other hand, the new tax measure appears to penalize borrowing, which businesses rely on as the foundation for growth.
They also noted that public concern has been limited so far, but warned that this might change once the real impact is felt, pointing to the revision of property tax a few years ago as an example of how frustrations may surface only later.
The Income Tax Bill of Bhutan 2025 introduced the “Earnings Stripping Rules” designed to prevent companies from using excessive interest deductions to reduce their taxable income. While the specific details and thresholds of these rules are outlined in the Income Tax Bill of Bhutan 2025, the general principle is to limit the deductibility of interest expenses to ensure that companies pay a fair share of taxes.
While acknowledging the government’s right to safeguard revenue, the private sector called for adjustments to ensure the provision reflects Bhutan’s realities. They suggested that exemptions should not be limited to startups, but should extend to all local businesses borrowing from financial institutions. They also suggested that Bhutan does not face the multinational profit-shifting challenges the rule was originally designed to address, and urged for tax policy to be aligned with the country’s broader economic goals, including encouraging entrepreneurship, attracting foreign investment, and strengthening local industries.
